We have set out below our thoughts on some of the questions we get asked most frequently. This is for general information only, and should not be taken as a recommendation. We recommend you seek professional advice before making an investment decision.
How can I pay off my mortgage faster?
Australia has a high rate of home ownership. Of the seven million households in Australia in 1997-1998, 70% lived in their own home and 39% of these owned their homes outright. Although superannuation as a proportion of household wealth is increasing, the home itself still represents 43% of all household wealth.
Yet with such a large number of people buying or owning their homes, two thirds of the population relies on Government support in retirement. Why is this?
In financial terms, your home is called a non-financial asset. In other words, you can’t use it to support yourself directly, although by owning a home you reduce the income you would otherwise require to pay rent. With homes representing 43% of all personal wealth in Australia, it is not surprising then that two thirds of us rely on the Government in retirement.
With the introduction of more sophisticated loans, it is now possible to repay your mortgage much faster. By having a flexible loan in place, you can direct all of your income into the loan, so that the interest is offset from day one. As you own more and more of your home, you can also access this money to start investing tax effectively.
These types of loans are known as Lines of Credit or Home Equity Loans. They are basically loans secured against your home that operate much like an ordinary bank account, with ATM access, direct credit, telephone banking and so on.
You need to be disciplined, as these types of loans can be like having a credit card the size of your house, and the costs to refinance your existing loan may outweigh the potential benefits. Please speak to an adviser to find out whether this system is appropriate for you.
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Why do I need a Will?
A will for most people is the most important Estate Planning document, as it determines who will be in charge of the administration of an estate and how the assets of the estate are to be distributed. The Will deals only with assets owned personally by the Willmaker upon death and although the Will is a relatively simple document many people never get around to preparing one. If a person dies without a Will then the deceased is deemed to have died “intestate” and in these circumstances the personal assets are distributed in accordance with the intestacy laws in each state. This can delay the distribution of your estate, and your estate may not be distributed as you wish.
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When should I review my Estate Planning?
Estate planning involves the structuring of your financial affairs so that your assets can be dealt with tax-effectively and according to your wishes in the event of your death or incapacity.
Should your financial or personal situation change, your Will should be updated. Any variation between the financial situation an individual has when writing a Will and the situation upon death may cause a drawn out handling of the assets which are not accounted for. This can be time consuming in an inopportune period.
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What is a Power of Attorney?
A Power of Attorney is a formal agreement by which one person (called donor) appoints another trusted person (called the attorney) to act on his/her behalf. The Power of Attorney is a separate document from a Will, and operates only during the lifetime of the donor. A Power of Attorney is often used as an estate planning tool.
Types of Powers of Attorney:
- General Powers of Attorney and;
- Enduring Powers of Attorney.
A General Power of Attorney is where the authority given by the donor to the attorney ceases upon the donor becoming mentally unable to manage his/her own affairs.
An Enduring Power of Attorney is where the authority given to the attorney by the donor is maintained whether mental incapacity has ensued or not.
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What is the best way to save for children?
Children can be taxed on investment income at rates higher than the highest marginal tax rates for adults to prevent people "hiding" assets in their children's names. This includes distributions from family trusts. Investing in a child's name is therefore generally not a tax effective strategy.
One of the most common ways to invest on behalf of children is to invest the money in trust. This way, the investment income is taxable to the trustee. If the trustee is a non-working parent, this can be a tax-effective method of investing for a child's education or future.
However, if the person holding the investment in trust for the child has other taxable income, then this can be less tax effective. In these situations, an Investment Bond may be appropriate, as they are taxed internally at a maximum rate of 30%.
Other issues to consider are access to the money once the child becomes legal age, and estate planning issues. Every situation is different, so we recommend that you speak with a financial planner before investing on behalf of a child.
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Should I borrow to invest?
Borrowing money, or gearing to invest can be a very effective way of speeding up your wealth creation. However it is important that you appreciate gearing increases the short-term risk of your investments by magnifying losses as well as gains. As such, this wealth accumulation strategy is generally long-term in nature and should be supported by a strong cash flow from other income. Negative gearing may also enable you to reduce tax on other income.
We have included more detailed information about borrowing to invest in the Investment Fundamentals section of this website.
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Why should I consolidate my super?
Many people have money sitting in super funds from jobs they left years ago. If your old employer super fund loses track of you, your money can eventually end up in Government coffers. Statistics suggest there is more than $2 billion worth of "lost" super.
Having more than one super fund also means receiving statements and other information from each fund – which means masses of paperwork every year. It may also mean you are paying multiple sets of fees. Consolidating your super into one account will mean you will only be charged one set of fees and receive paper work from only one institution.
With your super money in different funds, your investment strategy may not be effective. Consolidating your super allows you to have a effective investment strategy that may be more suitable to your particular situation and needs.
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Why shouldn't I invest all of my money in shares?
Diversifying across shares and other investment classes overcomes the volatility that any single investment type, individual share or fund manager will experience in the short term of an investment lifecycle.
A diversified portfolio invested across Australian and International shares, property, fixed interest and cash, will have a lower variation in return from year to year than a portfolio that solely invests in shares.
Therefore, diversification is an important aspect of your portfolio in order to provide consistency of returns.
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What is Salary Sacrificing?
Salary Sacrificing is an arrangement between an employee and employer to receive remuneration in the form of a contribution to superannnuation, as opposed to receiving it as salary.
This arrangement can be a useful tool for retirement planning and for tax effectiveness, as tax on superannuation contributions is 15% (plus a surcharge of up to 15% for higher income earners), and the tax on the earnings within superannuation is 15%.
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Should I invest more conservatively as I near retirement?
Many people are happy to invest their super for growth whilst working, but when they near retirement they change to a more conservative strategy. They assume that if they have only five years left until they retire, then they have only five years left to invest their super.
Many people also think they need to protect the capital value of their super and treat it like a short term investment as, generally, short term investments should be invested more conservatively. Superannuation prior to retirement is still a long term investment, even on the day you retire. When you retire, you will be looking to invest a large portion of your super to support you for the next 15-30 years (and hopefully longer!). This portion of your super money is still a long-term investment, and there is generally no need to change to a more conservative investment strategy.
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What should I do with my superannuation now I've retired?
Upon retirement, you have a choice of:
- Cashing out your benefits
- Taking an income stream for your benefits or
- Leaving your benefits in superannuation until the age of 65
Cashing out benefits is a complex area and lump sum tax can vary according to the components within an individuals benefit, and advice should be sought before planning this option. Should the lump sum not be placed back into superannuation, an individual can also miss out on the tax effectiveness of the income streams from superannuation.
An individual can take an income stream from the benefits in the form of an allocated pension or an annuity.
General benefits of allocated pensions include:
- there is no tax on the investment earnings within an allocated pension
- the pension payments received from allocated pensions and annuity are very tax-effective as any personal contributions you have made to superannuation are returned to you tax free as part of your income, and the balance is generally eligible for a tax rebate of 15%
- you retain access to your capital in the event of unforeseen expenses or emergencies
- benefits can also be paid tax-free to dependants in the event of death
An annuity is different in that it is a fixed interest product that has no potential for growth, but an annuity can be useful to qualify for Centrelink benefits, which enhances the "return" from an annuity investment.
Alternatively, if an individual chooses, and is under 65 years, he/she can simply leave the benefit in superannuation to accrue. At the age of 65 years, the benefit has to be withdrawn or an income stream commenced.
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I’ve heard that rules regarding superannuation and Centrelink have changed. How will this affect me?
Centrelink assesses an individual’s eligibility for a payment by taking into account assets and income.
Centrelink now doesn't count superannuation towards the assets and income tests until Age Pension age.
Therefore, leaving money in superannuation until the age of 65 years can be a useful strategy.
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Am I eligible for Centrelink benefits?
Centrelink assesses individual and couples on their eligibility to receive an allowance or pension by using an assets and an income test. Assessable assets and income varies depending on the type of asset or source of income, and financial situations can be altered to allow certain assets or income to be "hidden" from these tests.
This is a complex area, and a Financial Information Service Officer at Centrelink, or a financial planner can assess eligibility. Should you not be eligibile, a financial planner may be able to alter your financial situation in a legal manner in order for you to receive a Centrelink benefit.
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